US Decline Series: Shale transforms the US into a global energy giant

oil drilling

Technological innovations and a positive regulatory framework are transforming the United States into a major energy player that is beginning to change the global energy outlook. This GRI series challenges the myth of the American decline.

The US energy boom is not a coincidence. Rather, it is the product of three decades of systematic efforts to develop new technologies in the oil and gas upstream sector. The extraordinary development of shale gas industry in the United States has been made possible by a strong industrial base, R&D incentives and substantial tax credits offered to the industry by the US government after the 1973 and 1979 oil shocks, combined with a positive regulatory framework and the hike in oil and gas prices.

But unlike conventional oil and gas markets dominated by the large multinational giants, the US shale boom was created and is still dominated by the small- and medium-sized independent US companies. They quickly recognized the new market realities and introduced new technologies, including hydraulic fracturing and horizontal drilling, to take advantage of the high prices of oil and gas in the mid-2000s. The same companies showed a high level of flexibility in 2012 when the shale gas glut hit the US market, rapidly moving into production of the much more lucrative shale oil that had already started to bite into the profit margins of the world’s largest oil producers.

Between 2000 and 2010, shale gas production rose from less than 1 percent of US natural gas production to more than 20 percent, and the US Energy Information Administration estimates that by 2035 shale gas will make up 60 percent of total natural gas production. Similarly, the process will transform the United States into the largest producer of oil in the world by 2015, according to the International Energy Agency.

The shale boom is also changing the US economy. The sudden increase in natural gas production lowered the price of energy, giving the US economy a strong competitive edge over its rivals in Europe and Asia. The 2011 IHS study estimated that the shale gas industry supported 600,000 new jobs that were directly or indirectly linked to the industry in 2010, and this number will grow by another 1 million by 2035. The report also predicts that the shale industry will add more than $231 billion to the US GDP, and contribute with more than $57 billion in taxes over the next 20 years.

In terms of the geopolitics of energy, shale gas is also a global game changer. Due to the unlocking of its shale oil and gas resources, the United States will hardly import any gas or oil by 2035 and could potentially become a major exporter of energy. This will give Washington an additional political and economic lever as its dependence on volatile Middle Eastern oil decreases and the country takes advantage of its potential to influence energy markets.

However, US shale story could face certain challenges. Apart from the environmental issues, extraction of oil and gas from shale is expensive, and producers need high prices of oil and gas to remain profitable, which is directly related to the trends in the global energy markets. The current low price of natural gas in the US is already making shale gas producers’ profit margins narrow, and the shale oil industry needs the price of oil to remain above $80 to keep them in the black.

With the oil glut caused by the sudden hike in oil production about to hit the country, US politicians and businesses will soon have to decide on how to manage the existing ban on crude oil exports, and this decision will inevitably have consequences on US domestic consumers, as well as on the overall economy.

US shale oil and gas potential will most likely be exhausted in the next 20 to 30 years. Despite the current appeal of the resource, the country should not waste this energy shortfall, but use it as a bridge towards the post-shale and post-carbon period, primarily by continuing to develop renewable resources and new energy technologies.

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Categories: Natural resources, North America

Author:Dr. Ante Batovic

Ante is a foreign policy and energy analyst. Previously he was a lecturer in International History at the University of Zadar where he specialised in Cold War and East European history. He was a visiting fellow at the LSE IDEAS centre and the fellow of the Robert Schuman Foundation in the European Parliament. He holds a Masters degree in Global Politics from the London School of Economics and a PhD in History from the University of Zadar. He is an experienced researcher interested in foreign policy, political economy and energy.

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